GERMANY: As investors awaited the release of the minutes from the July meeting of the European Central Bank, euro zone bond rates decreased somewhat but remained close to multi-week highs on Thursday.

At that meeting, the ECB doubled its previous guidance on interest rates and increased them by 50 basis points (bps), along with the Transmission Protection Instrument (TPI), a new bond-buying programme, to prevent the spread between borrowing costs for Germany and highly indebted member states from widening. 

They do so as the money markets now anticipate 100 basis points of ECB rate increases by October. For September, a 50 bps increase is already completely anticipated, with a 20% likelihood of a 75 bps increase. With yet another steep increase in natural gas prices and Russia signalling future supply constraints, those wagers have just increased significantly. These have increased concerns about inflation in the euro zone, where price rise hit a record high of 8.9% in July, exceeding the ECB's 2% objective by more than four times, and have led to hawkish language from ECB policymakers.

Germany's 10-year yield was at 1.39% at the start of the day, its highest level since early July, when it first increased on Wednesday. By 10:51 GMT on Thursday, it had dropped 3 basis points to 1.33%. After increasing to 0.94% on Wednesday, the two-year yield decreased 7 basis points to 0.84%.

The widely watched risk premium over German peers dropped to 224 bps, below nearly one-month highs touched earlier in the week over 230 bps, as Italy's 10-year yield dropped 9 basis points to 3.58%. On Thursday, yields decreased despite a 2% increase in the Dutch contract for September delivery and rising gas costs.

Beating analyst expectations, German business morale declined less than anticipated. The country's economy expanded in the second quarter, that would typically be expected to raise rates. "Let's see if this is the case again or if we are seeing a short-covering bounce ahead of Jackson Hole," said Antoine Bouvet, senior rates strategist at ING. "In the past week and a half or so, the bond rallies we had in the morning were substantially sold into. He was referring to the upcoming Thursday commencement of the top central bankers' annual meeting in the United States.

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